Regional aircraft continue to drag on Bombardier's results, but order bubble may emerge soon
Bombardier and many others had expected the North American and European regional markets to rebound much more strongly, but economic volatility has stalled plans by the sector to re-equip their fleets just as their legacy and low-cost counterparts are doing. However, once the log jam breaks, regionals in North America and Europe are expected to place big orders to replenish their fleets. For Bombardier, this would be ideal since it has a very large installed base of 50-seat regional jets as well as 30- to 50-seat turboprops.
The market is upguaging, said Bombardier Aerospace President Guy Hachey, pointing out that, for 50 seaters, the limiting factor has been union scope clauses and, now, the economy. However, being the incumbent on so many CRJ 100/200s as well as the Q200/300 replacement campaigns will afford an opportunity for the CRJ 700/900/1000 and with the Q400.
As for the emerging markets, Bombardier will also benefit from the availability of all the 50 seaters coming out of the North American and European markets. The emerging markets also ripe for the larger RJs and Mr Hachey reported strong interest there for the CRJ 1000.
The aerospace division – which manufactures business and regional jets – is in the midst of several campaigns, the outcome of determining whether the company will need to pare back production rates for its smaller business jets as well as the Q400 and the CRJs.
Volatility is also dampening the business aviation sector especially as large numbers of smaller business jets lay fallow, weakening demand and placing price pressure on new jets.
Compounding this, according to Mr Hachey, is the fact that Bombardier lagged behind Embraer in deploying sales and support staff in emerging economies – something it is desperately trying to correct as Embraer wins more orders from the emerging regions.
“We have been concentrating on our fortress markets in North American and Europe where we have the most penetration, but we are aggressively deploying our resource to emerging markets to take advantage of these new opportunities,” he said. “We realised we are not as geographically diverse as we need to be so we are quickly deploying resources. Also a lot of our customers are on the sidelines because of the economic instability in those markets so there is more activity in the emerging markets.”
Bombardier, however, won a major victory in its 30-aircraft SpiceJet order for Q400s, the first in India. Mr Hachey indicated the order has prompted increasing interest from other Indian operators for both business and commercial aircraft.
The market will have more clarity after the next few months and the company anticipates regional aircraft orders ticking up more substantially. It already has eight to 10 campaigns underway and landing a few of those would change things for next year, he said.
CSeries still beats MAX
Mr Hachey said although information on the Boeing 737 MAX was sketchy, he believed the CS300 compares well against its newest competitor the 737-700 MAX. Bombardier expects a double-digit advantage over the new MAX and, for the A319 neo, it will have 12% better cash operating costs. He fell back on the same argument Bombardier has used when comparing the CSeries to the new Airbus models, saying there is a big difference between a re-engined product and a clean-sheet design.
“You can’t just look at the engine,” he said. “We have a 100% new aircraft with new materials, new wing, all new systems. We know more on the specific comparisons as time goes by.”
Although Boeing is still considering the fan diameter, Mr Hachey made a point of saying a 66-inch fan would be smaller than the CSeries and Airbus neo, saying it reduces the bypass ratio, a key driver in fuel efficiency.
In the meantime, he expressed pleasure with the CSeries progress, not only in reaching milestones but in gaining new customers. Testing was completed successfully on the first test pylon by Spirit as well as the Pratt & Whitney PW1500G. The handful of new customers he alluded to in the past have all been announced and he is now working with another group of new customers with four or five campaigns well advanced.
“We anticipate a steady flow of orders in the months to come,” he said. “There is no abatement of interest. In fact, now that there is more visibility on what Boeing is going to do that is good for the CSeries. We are still waiting on what Embraer will do, however.”
During the second quarter, Bombardier Aerospace received 43 net orders for the CSeries family valued at USD2.8 billion, based on list prices. Among these, an order from Korean Air for 10 CS300 aircraft with 10 options on CS300 aircraft, makes this airline the launch customer for the CSeries aircraft in Asia. There were 133 aircraft firm orders for the CSeries aircraft family with 119 options at the end of the quarter. The Republic Airways order has not changed since the company’s acquisition of more Airbus aircraft for its Frontier subsidiary.
Bombardier posts improving results, income up in 2Q
The transportation and aerospace manufacturer posted profits of USD211 million on revenues of USD4.7 million during the second quarter, which was up from USD138 million on revenues of USD4 million in 2Q2010. Revenues were up 17% and EBIT earnings reached USD296 million compared to USD249 million in the last second quarter for a 6.2% EBIT margin, shy of the 10% target goal it expects to reach in 2013.
Aerospace EBIT earnings totalled USD105 million on USD2.1 billion in revenues. Revenues were up from USD1.8 billion during the second quarter of 2010 with a margin of 5% for the quarter ending 31-Jul-2011. In the year-ago period, it earned USD101 million and posted a 5.2% margin.
The company cited lower levels of advance payments from customers than originally anticipated at the beginning of the year for the changes and said it expected to continue given the economic uncertainty in both the US and Europe. It said there have been order deferrals in the regional market and the division has also suffered from a tighter credit market in the last few months.
Fifty-six aircraft were delivered in the quarter, up from the 49 delivered in 2Q2011. Backlog increased by 20% reaching USD23 billion, up from the USD19.2 billion posted on 31-Jan-2011. It remains the industry leader in terms of revenues and units delivery in the general aviation marketplace, according to the General Aviation Manufacturers Association (GAMA). Its business aviation division experienced increased orders during the quarter with 43 net orders up 14 year-on-year.
Embraer winning campaigns
Recent campaign wins for Embraer, noted by analysts during yesterday’s earnings call question period, included the all-important leasing sector and air leasing for five ERJ 175s and 15 ERJ 190s. In addition, CDB Leasing confirmed a second batch of ERJ 190s for China Southern. GECAS also ordered two ERJ 190s. In the emerging markets, there was an additional order for two ERJ 190s from Air Atsana and another 10 from Kenya Airways.
“Embraer entered the recession with strong backlog while ours was average by comparison,” said Mr Hachey. “We’ve been chewing through our backlog and now it is much less. And we are encountering a more competitive environment overall. There are now five players when there were two in past. They are more geographically global and they have been winning in emerging markets for that reason and we have not.”
He evaluated the competition, saying the Mitsubishi MRJ has not been all that successful although it is a competitor on most campaigns. Sukhoi, with its Superjet, has been somewhat successful and is also a new competitor. While the AVIC 21 has taken a major delay, the result is more barriers for competing in China where markets are closed off to non-Chinese manufacturers.
“Despite more competition, we still have the the lowest cost value proposition out there,” he concluded, adding that much of the focus is on ensuring the CSeries is a liquid asset, especially for leasing companies.
With respect to its collaboration deal with Comac, Mr Hachey said it is proceeding with the two companies, working in five or six areas including looking at the supply chain to leverage their combined volume. It is also working to learn how they can leverage their respective strengths including marketing their aircraft in each other's strong regions.
“We’ve found many areas of commonality on supplies as well as on aircraft,” he explained. “They are behind us on the design curve and we are working to bring them closer to develop better customer offerings. Our teams will work together over the next few quarters but whether we will do something or not remains to be seen.”
Mr Hachey reported that sales for mid- and large-sized business jets were continuing but the company was seeing financial institutions “recoiling” from financing business aviation, thus delaying several transactions expected to close during the quarter. However, those orders were taking longer to close as opposed to threatening with cancellation. The nervousness over the market, he suggested, is what prompted Delta to delay its small jet decision.
“They probably went where they had the most need and then decided to wait on the next order,” he said. “In the regional sector, those airlines are not as robust as the larger airlines so those customers are shakier in terms of their financial situation. Right now they are concentrating on the larger aircraft and our backlog will be full for a long time. They have to juggle the risk of waiting versus ordering and having slots, whether they are conversions of options or new orders.”
“That doesn’t mean there isn’t a lot of activity,” he said. “There is a lot of interest and we are getting requests for quotes. They are doing their evaluations. If we get more economic stability you will see a spate of new orders.”
Regional airlines, on the other hand, were growing cautious. Even so, Mr Hachey reported a lot of activity for the Q400 turboprop which enjoys a solid pipeline. He reported six or seven campaigns well advanced for those replenishing their fleets.
Interestingly, regionals – stuck with too many 50-seaters – are in critical need of replacing them with larger aircraft. However, those plans have also stalled as they watch the capacity plans of their major-carrier partners change with an anxious consumer.
“They are waiting on the sidelines,” said Mr Hachey. “It's a question of timing. It may mean we will have to reduce the production rate. We made a slight adjustment in June on the Q400 which is now taking effect, but we will need to revisit the question in the fall.”
He indicated with campaigns so close, he could not specify when such a production rate decision would be taken, instead eager to give them as much possible time to come to fruition. If the campaigns fail, it is likely the CRJ production rate will go down effective during the first quarter of 2012. He is hoping to avoid furloughs, instead reassigning employees to the CSeries and larger business aviation production lines.
“We are okay for this year in terms of the skyline,” he added. “Next year we still have quite a few positions open. We are in the same position with the Q400. We have three or four campaigns in play but they are remaining on the sidelines because they are worried about where the market is going. We have, however, an opportunity to have a good year next year.”
As for regional aircraft orders in the emerging markets, Mr Hachey noted most of the activity was around the larger jets and narrowbody aircraft.